Apple: Stock Charts Show It May Be Ready for a Reaction Rally

Also, the SPX appears likely to reach the target zone.

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In reading "The History of Nations," we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, 'til their attention is caught by some new folly more captivating than the first.

Apple (NASDAQ:AAPL), once the darling stock of the investment world, is down more than 35% since reaching its peak of $693.21 in September 2012. Interestingly, this price peak came about a year after the fundamentals started indicating things were headed in the wrong direction: Apple's iPhone and iPad profit margins actually peaked in the second and third quarters of 2011, respectively -- in fact, iPad margins are now less than half of what they were at that peak. And while some investors bought Apple because they genuinely loved and believed in the company, more and more fund managers began buying it simply because the price seemed invincible and destined to head higher forever. So despite the falling margins, the stock fell victim to its own momentum and entered a blow-off parabolic rally in early 2012.

It wasn't too long ago that it was still fun to say "Apple is the market," but that saying no longer applies. Since autumn of 2012, the S&P 500 (INDEXSP:.INX) has been in nonstop rally mode, but Apple's been on the outs. And as is so often the case with parabolic rallies, the stock gave back all those late gains with equally-blinding speed.

In the chart below, we can see that Apple and the SPX used to be fairly well-correlated, but recently they've been moving in completely opposite directions. Note the chart is logarithmic scale, so the recent decline in AAPL doesn't look nearly as devastating as it's actually been for investors, most of whom do not have the benefit of being able to spend "logarithmic money."

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I didn't call attention to Apple simply to illustrate how quickly "darling" can turn to "ugly" in the investment world (though there is a broader lesson to be learned here); I called attention to it because Apple looks like it finally has an opportunity to put together a more meaningful bounce.

I'm not certain it will, of course, but I've put together a couple charts which should help us figure out where it's headed. Let's start off with the daily: I'm inclined to think it has more bounce left in it because the rally from 382 appears to be cleanly impulsive (meaning it has five waves). There is only one way a five wave rally could fit in this position and not have prices ultimately head higher, and that would be if this pattern is a somewhat rare "running flat" correction -- so I have to favor the odds that the rare beast isn't the one who's shown up at the party this time.

Now, there are two ways we can get to higher prices: The first is fairly direct, and is shown in blue below. The second heads a bit lower first, but should remain above 382 (shown in black); if AAPL sustains trade below 382, then all bets are off. I've noted the trigger levels to watch, and a series of corresponding trigger targets, on the chart below.

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Zooming in on a five-minute chart of AAPL, I'm unable to rule out either path until the market makes its next move. Sustained trade below 430 would hint at the black path above, while trade below 418 would largely confirm it. Sustained trade above 446 in the near future would suggest the blue path.

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There's been no change in SPX, and it still appears likely the second target of 1680-90 will be reached -- honestly, SPX has been kind of boring to write about lately, which is why I decided to share some of my chart work on Apple. Once SPX claimed the 1600 zone, we pretty much knew to expect 1640-1650; once the KBW Bank Index (INDEXDJX:BKX) claimed 61.06, we knew to expect 1680-1690 SPX. There's been little in the way of excitement since; and that's a good thing for anyone who got long at the breakout of 1600.

The only thing I'd warn here is that this is the type of market that can lull bulls into a deep complacency, and markets like this can become ripe for "an event." Always remember the old market adage: "Bears take the elevator; bulls take the stairs."

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In conclusion, SPX has come a mere five points from the target zone, and barring a surprise, presently looks reasonably likely to reach it. Assuming we get there, we'll reassess the outlook at that point. Meanwhile, Apple may present an opportunity -- and if nothing else, there are some fairly clear signals and levels to watch. Knowing when and where the odds are shifting in order to get away from a losing trade can be just as important as being able to "predict the future." Trade safe.

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